Shares of Palo Alto Networks (PANW) had a successful public debut last Friday. Although shares ended near their lows of the day at $53.13, shares still traded up 26% compared to their offering price of $42.
The Public Offering
Palo Alto Networks the provider of network security solutions for enterprises, service providers and government entities sold 6.2 million shares for $42 a piece. Palo Alto thereby raised gross proceeds of $260 million at a $2.8 billion valuation. Initially the bankers and management set the offering price range at $38-$40 per share, which got revised upwards from an initial price range of $34-$37 on July 9th. Selling shareholders have offered around 1.5 million shares in the public offering. The company only offered 9% of its 66.6 million shares outstanding which values the firm at $3.5 billion based on Friday's closing price. Major banks which brought the company public were Morgan Stanley, Goldman Sachs and Citigroup.
Strong Cloud IPO Market
Demand for Palo Alto Network's public offering was great as the offering was more than 40 times oversubscribed. Other cloud-based companies which have gone public this year have seen a strong share price performance. Shares of Splunk (SPLK) rose an incredible 68% compared to their offer price, valuing the firm at $2.7 billion. Shares of Demandware (DWRE) rose 59% since they were offered, while shares of Guidewire Software (GWRE) more than doubled, trading with gains of 113%.
Palo Alto Networks generated $118.6 million sales for its full year of 2011 which marks an astonishing growth compared to 2009's annual revenues of $13.4 million. The company reported a $12.5 million loss over its fiscal year of 2011. For the first 9 months of its fiscal year of 2012 the company generated $179.5 million in revenues on which it reported a $5.3 million profit. Based on a rough annual revenues estimate of $250 million for 2012, the firm is valued around 14 times annual revenues.
Despite stunning revenue growth I always have difficulties attaching a "fair" value to these kind of high growth businesses. With revenue growth exceeding 100% a year valuation multiples come down quickly, but so might growth as competition in the cloud industry will undoubtedly intensify. At the same time, I am hesitant to short these lower market capitalization companies as a take-out by a big technology company is always possible. For investors with a higher risk tolerance, this could be a long term opportunity.